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PREVIEW -Australia c.bank to hold rates, may be done cutting

Wayne Cole
Sunday, 3 Nov 2013 | 8:40 PM ET

* RBA expected to hold rates at 2.5 pct for third month

* Policy announcement due at 0330 GMT on Nov. 5

* Upbeat housing, retail data diminish prospect of further easing

SYDNEY, Nov 4 (Reuters) - Australia's central bank is almost certain to leave interest rates unchanged for a third month when it meets this week amid signs past cuts are filtering through to economic activity, particularly in the housing market.

Growth in the world's 12th largest economy has started to stabilise in recent months with rising asset prices, consumer spending and confidence suggesting policy makers can hold off on any further stimulus.

A Reuters poll of 23 analysts found all expected the Reserve Bank of Australia (RBA) to keep rates steady at a record low of 2.5 percent at its regular policy meeting on Tuesday.

The central bank releases a short statement at 0330 GMT which should reiterate its desire to see a lower Australian dollar while noting that low rates have underpinned consumer confidence and asset prices.

"The press release should read a little more optimistically, and the RBA seems reluctant to cut rates further for fear of overheating the housing market," said Kieran Davies, chief economist at Barclays.

Instead, the bank would prefer for further stimulus to come via a weaker currency, said Davies. "Consequently, the November press release seems likely to complain about the exchange rate."

So far, the market has not been cooperating with the RBA, keeping the local dollar up at $0.9465, compared with $0.8950 when it last cut rates in August.

The stubborn strength of the currency is a major reason some economists still expect at least one more policy easing, though that group has been dwindling in the face of better news on housing and consumption.

Only eight of the 23 analysts surveyed see another cut with the remainder convinced that 2.5 percent will be the floor for this cycle. Financial markets have also pared back expectations of a move with interbank futures <0#YIB:> putting the probability of an easing at no more than one-in-three.

THE WEALTH EFFECT

Gross domestic product rose 2.6 percent in the second quarter from a year earlier, short of the 3.25-3.5 percent pace that economists consider "normal", but still the envy of much of the developed world with Australia not suffering a recession for 22 years.

The resources-rich $1.4 trillion economy is forecast to grow around 2.5 percent for 2013.

The prospects of a cut in rates seemed to diminish further on Monday when the government reported retail sales increase by 0.8 percent in September, twice what analysts expected and the biggest gain in seven months.

Adjusting for inflation, sales were up 0.7 percent in the three months to September, again topping forecasts and making a useful contribution to economic growth in the quarter.

The Australian Bureau of Statistics also released its measure of prices for detached houses in the capital cities. That showed a jump of 1.9 percent in the three months to September, putting it 7.6 percent higher for the year and at a record.

A broader measure of home prices from property consultant RP Data-Rismark showed a healthy increase of 1.3 percent in October, taking it to an all-time high.

Annual growth in its price index accelerated to a three-year high of 7.9 percent, from 5.5 percent in September, led by gains in Australia's two most populous cities, Sydney and Melbourne.

Higher home prices combined with a sustained rally in equities have in turn helped repair household balanced sheets and lift sentiment. The RBA estimates that the net worth of Australians has increased by around 15 percent, or more than A$800 billion, since the end of 2011.

Yet the jury is out on whether improving confidence will actually lead businesses to increase their spending plans, something very much needed to help offset a coming slowdown in mining investment.

Fortunately for policy makers, inflation would not seem to be a bar to a further easing should it prove necessary.

While consumer prices registered a surprisingly large increase in the third quarter it looked to be a one-off event and other measure of inflation remained benign.

TD Securities-Melbourne Institute's monthly measure of consumer prices was released on Monday and showed a welcome moderation in price pressures. Its main index rose just 0.1 percent in October, from September, while the annual pace stayed at 2.1 percent for a third month running.

The central bank aims to keep inflation within a band of 2 to 3 percent on average over the long term.

"Compared with the surprise jump in headline inflation in the September quarter, this October report is rather benign, and starts the final quarter of the year with a whisper," said TD's head of Asia-Pacific Research, Annette Beacher.

(Reporting by Wayne Cole; Editing by Shri Navaratnam)